Do I sell or do I hold now? Great cash flow VS quick profit?

Question

Hey all! Long time reader, hope to start contributing to the community soon. Hoping to get some feedback on my situation, not sure what to do...All these numbers are conservative, I appreciate and understand the 50% expense rule/the true market value of my home. Here's the summary:

Me

I'm 27 years old, living in Columbus Ohio working as a contractor. My heart is in real estate investing, I want to go full time at it sooner than later. I have about $240k cash saved.

House 1

Four years ago I bought a shell of a house for $100k in a transient neighborhood a mile from Ohio State University. $85k balance on mortgage at 3.7%, my PITI is only $750. It's a B- neighborhood, mix of grad students, young professionals, and a family here and there. Relatively low crime, our street specifically is very low in crime. Our street also coveted, it's a dead end and a lot of people in the neighborhood want to live on this block. Over the years I did a complete high end rennovation at the home. If I knew then what I know now, I wouldn't have gone quite so over the top. Marble, hardwood, custom bathrooms and kitchen. New roof, insulation, windows, etc.  I was able to do the full rehab for $35K BC of my years in construction/did all the work myself. So, $135k all in. Market value is now conservatively $250k. Likely will go for closer to $300k, this neighborhood is on fire right now. I've occupied for years so won't pay taxes on cap gain. Let's saw after closing costs I'll walk with no less than $150k cash if I sell-$35k in repairs=$115k profit.

House will rent for $2k per month all day long with low vacancy, going high on the expenses could say I cash flow $750/month. Everything is new, thinking will flow much closer to $1000 long term.

House 2

Just got in lear with purchase option contract on my next property, it's a really well maintained 10 cap in very nice neighborhood. Super solid house, would yield 10 cap/ 20% cash on cash right away if I rented out in full but plan is to just break even while occupying with air bnb/renting a room. Financials are great on this house long term, not so much looking for advice on this one but some details are important for the big picture. Purchase price $229k.

Questions

So, never thought I'd sell house 1 because it is such a great rental. But over $100k in cash to go invest with sure is tempting. Ultimately, this post is about seeking feedback on Selling house 1 vs Renting house 1.

A few important details, rent house 1 I am putting all my cash into house 2. My debt to income will not allow me to get an additional mortgage on house two. So, until house 1 is seasoned with tenants I would have all my cash tied up in house 2.

Options:

1. Sell house 1, reinvest that cash and get a mortgage on house two. Would leave me with a lot of cash to go invest more aggressively.

2. Rent house 1, pay cash for house 2, and refinance house two next year when I can get DTI order. Will be cash strapped in the meantime.

What's your vote/outlook?

Ben Raygor · Answer

Seems like a pretty good problem to have.

My general outlook is that I'd probably be slower to sell House 1 since it is cash flowing nicely at $750 (and you're saying that is conservative!) when you are only $135,000 into the house.  I don't know how many hours of work you put into the place yourself, but your $115,000 gain at sale would basically be your pay for all your sweat, skill and time.

If the property cash flowed $800/month, it would take about 12 years for you to cash flow $115,000 from House 1, and all you have to do is be a landlord (not saying it is easy, but probably much less time involved than what you put into the house to get it to this point).  In 12 years the market value of the house COULD be the same as right now.  In that case, you'd be raking in over $200,000.  The market could be much lower too.  The majority of market experts are telling us that we are in a high market currently.  So if you hold, you'd most likely be waiting out another cycle when the market works its way down and then back up.

How long will it take for House 1 to be "seasoned" with tenants?  Some institutions need 6 months, some need 12 months or more.  If you can be cash strapped for a short amount of time, I'd lean that direction.  If you need to be cash strapped for much longer and you really think you will miss out on some fantastic buys that will ultimately cash flow or appreciate better than House 1, then I could see you selling House 1.

It sounds like you've done awesome with House 1 and I'd understand if you really don't want to miss an opportunity to sell in a high market.  I just think that you have fantastic cash flow, according to your numbers, and would be hesitant to sell it right now.  If you do choose to sell it, hopefully you can identify the next investment property soon and 1031 exchange it to save a lot of money in taxes.

Thomas S. · Answer

Not sure where you get your numbers for cash flow but my experience says it is a poor rental option. It is over improved in a ideal location making it perfect to sell not rent.

The rent is also too low for a investment worth 300K. Minimum your rent would need to be $3000 for you to see any positive cash flow and you would need to pull al equity to achieve that. You state you understand expenses you then ignore the reality in incorrectly assuming positive cash flow.

$2000 rent, 50% expenses, debt repayment $750, opportunity value of dead equity $1800. Negative cash flow $1550/month.

If you could pull out all the equity you would increase the cash flow but still be negative unfortunately. Best you could hope for is negative $450/month.

Steve K. · Answer

sorry then, @Craig Masters , I can't speak to 1099 qualifications....W-2 is my first language.

Craig Masters · Answer

Thank you @steve K

Originally posted by @Steve K.:

I like this thoughts

Part of my dilemma is I'm moving into house 2, so will want owner occupied mortgage on house 2. Hard for me to give up the great terms I have on house 1 (3.7% apr, $750 piti) but I know I must make a sacrifice somewhere.

Well, the house is over 100 years old but everything is new except some plumbing and electric. Cap ex should be reasonable.

I'm right around 800 credit score, it's the income and being a 1099 worker that makes this hard. It's crazy, the system is designed to keep us in 9-5 jobs.

Thanks @Kyle Kollette. Good thought, though I hear Helocs have higher rates and think they are variable. Would be nice to get locked in on something with rates low still.

Steve K. · Answer

@Craig Masters , perhaps you'd find it useful to read this similar discussion:

https://www.biggerpockets.com/forums/48/topics/464...

Wow, congrats! A 27 yr old with almost $465k in cash and equity.

Since you seem to like BRRRR (as I do).....why not try thinking of your current primary residence as your first BRRRR?

"I have $85k loan on a $300k property (LTV 28% ); time to cash-out refi". I think of it as as you have $135k capital invested, and $80k of "rehab profit and/or market appreciation".

What if you took a new 80% LTV owner occupied loan on it ($240K), and take cash out of $155k. You would then have a $300k rental property with none of your original capital in it, in fact, you pocket $20k more than the $135k you put in. The remaining $60k appreciation is the 20% down in the loan. Once the refi is over, think about taking your $155k cash and your other $240k cash and buy more BRRRR.

I assume your current home is a viable rental worthy of being in your portfolio (your monthly net cashflow as a rental will be lower, with the higher mortgage payment.....but you have zero capital invested. Cash on cash return is infinite.)

You seem to be really financially sound with $240k in the bank and $215k equity ....why do you think you have poor credit worthiness?

Craig Masters · Answer

Ben- thanks for the thoughts, since I'm owner occupying house 1 the profits will be tax free. Appreciate the point all I have to do is be a landlord. I guess the delima is with $400kish in cash I could put together a great, cash flowing portfolio.

Rob- plenty of deals still out there, just takes building relationships.

If I cash out, I'll initiate the brrr strategy to start building a larger portfolio. Still feeling on the fence on which route to take.

Robert Ellis · Answer

What would you do if you sold all of these? I think your significant savings is already enough. A lot of people that sell right now can't find anything to buy, but also it couldn't be a better time to sell. If you sold all of those what would you do with all of the cash? Fix and flip? Start your own business? Buy and hold? Whatever you do if you are going to quit your job something has to bring in income for you and your family. I'd be happy to take a look at your properties. We are a local real estate team here in Cbus.

Do I sell or do I hold now? Great cash flow VS quick profit?

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